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Rational quantitative trading in efficient markets

Stefano Rossi () and Katrin Tinn ()

Journal of Economic Theory, 2021, vol. 191, issue C

Abstract: We present a model where quantitative trading − trading strategies based on the quantitative analysis of prices, volumes, and other asset and market characteristics − is systematically profitable for sophisticated traders whose only source of private information is knowing better than other market participants how many fundamental traders, i.e., traders informed about fundamentals, are active in the market. In equilibrium, the direction of optimal quantitative trading depends on the number of fundamental traders and often switches sign when order flow increases: with few fundamental traders, optimal quantitative trading is trend-following (re. contrarian) after small (re. large) price changes; with many fundamental traders, the opposite holds: it is contrarian (re. trend-following) after small (re. large) price changes.

Keywords: Quantitative trading; Uncertainty about informed trading; Market efficiency; Learning (search for similar items in EconPapers)
JEL-codes: D82 D84 G12 G14 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:191:y:2021:i:c:s0022053120301204

DOI: 10.1016/j.jet.2020.105127

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